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Pension asset picks hit firms - Nobel laureate

GLOBAL – Nobel Prize-winning economist Robert Merton says the asset allocation of corporate pension funds has a larger than acknowledged impact on the economic value of the companies.

“You can’t look at pension assets in a vacuum,” said Merton, who is a professor at Harvard University Business School. He told IPE: “The pension allocation has a big impact on the firm and the risk of the equity.”

“Companies may not realise the riskiness of their own equity is down to the riskiness of their pension assets,” he said. He called on companies to find a “strategic solution” to the phenomenon that pension fund assets are more volatile than the operating assets of the firm. A typical US scheme, with a 60% allocation to equities, is carrying more risk than company management may realise, he explained.

Speaking at a media briefing, Merton said corporates needed to make a “decision on how much you put into equities pension fund – they change the total risk of the firm”. He added: “Higher risk is not bad – you just have to pay for it.”

‘Immunising’ a scheme by removing equity risk in the pension plan was a way to remove risk in the whole company. “So there’s some decision to be made – but in the context of the whole firm.”

And he said this process was “a good place to start” – and ask why wouldn’t you do this if you were a pension trustee.

Merton was critical of defined contribution schemes that shift risk to individuals and away from companies. “It makes no sense for individuals to bear these risks,” he said. “DC just doesn’t perform the functionality of a well-funded DB defined benefit DB plan.”

He also said it was unlikely the US government would let the Pension Benefit Guaranty Corp. go under – but said the difficulties of the PBGC should act as a warning to UK, with its new Pension Protection Fund.

Merton won the Nobel Prize in 1997 with Myron Scholes for developing a new method of determining the value of derivatives.

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